The TaxWatch Blog

Kurt Wenner

How Attractive is Florida's Business Tax Climate?

Like beauty, the attractiveness of a state’s business climate is in the eye of the beholder. There are many measures of states’ tax and business climates. Differences in what is considered and what is thought to be important result in some disparate rankings. A few years back, Florida TaxWatch examined tax, business climate, and competitiveness rankings from seven different organizations and found that Florida’s ranking ranged from 5th to 28th.

The latest edition of the Tax Foundation’s annual BusinessTax Climate Index has been released and it rates Florida’s as having the 4th best tax climate in the nation. The Index looks at five major taxes: corporate income, personal income, sales, property, and unemployment insurance. It evaluates more than 100 variables in these areas to develop scores for each state. Generally, states with low rates and broad bases are ranked highly. States with complex, non-neutral taxes with comparatively high rates are at the bottom. An absence of one of the major taxes also gives a big boost to a state’s ranking. The fact that Florida has no personal income tax is the main reason we rank near the top. Each tax is weighted differently, and the personal income tax is given the highest weight (almost one-third of the total).

In addition to its number one rank for personal income taxes, Florida ranks 2nd for unemployment insurance, 10th for property taxes, 19th for corporate income taxes and 28th for sales taxes. Florida’s total rank of 4th is the same as last year’s and is up one spot from 2015.

Wyoming holds the top ranking and New Jersey in 50th. The other three largest states do not score as well as Florida--California (48th) and New York (49th) rank near the bottom, while Texas stands at 14th.

The Tax Foundation’s 2017 Business Tax Climate Index is probably the most comprehensive and detailed look at state tax structures and does a good job with the very difficult task of trying to create apples to apples comparisons.

Still, there are instances where one could argue the Index overstates the quality of Florida’s business tax environment, particularly in the areas of sales and property taxes. The Index docks states for taxing business inputs, yet Florida is the only state to uniformly tax commercial leases. This adds up to 7.5 percent to a business’s occupancy costs, a major competitive disadvantage. Florida’s property tax system, due to large homestead exemptions and Save Our Homes, shifts tax burden from homestead to non-homestead property, including businesses. Florida’s property tax also applies to business tangible personal property (TPP). The Index does not directly consider TPP taxes, due to data availability constraints, but it does note that TPP taxes can affect business decisions and that states are moving away from them. In 2011, a Florida TaxWatch task force recommended that Florida set a goal of eliminating TPP taxes.

These factors contribute to the high portion of total taxes that are paid by business. A report by the Council on State Taxation estimates that 52.6 percent of Florida’s total state and local taxes are paid by businesses, the 11th highest percentage in the nation.

It is likely that most states would find something to quibble with in the Index; however, the premise of the Index is largely unassailable: simple tax structures with low rates, broad bases and the avoidance of taxing business inputs are preferable.

Many factors impact a state’s attractiveness to business investment, such as workforce, education, infrastructure, access to raw materials, and quality of life. But taxes do matter, and as the Index points out, tax reform can often be accomplished much faster than significant improvements in areas such as education, healthcare, and transportation.

The Index does highlight many of the strengths and weaknesses of Florida’s tax structure. Hopefully, Florida’s elected officials will work to improve our tax system by exploring ideas such as reducing or eliminating the sales tax on commercial leases, addressing the inequities of the property tax system, eliminating the tangible personal property tax, and collecting sales and use taxes on internet purchases.